What is a Credit Card?

What is a credit card and how does it work

A credit card is an unsecured loan facility which is normally issued in the form of a small plastic card that can easily fit in a wallet and includes the credit card details, such as the credit card number and card name, and other encoded information on a computer chip or magnetic strip as shown below.

A credit card is a convenient way of borrowing money as it provides you with a line of credit which is always available to you when you need it. Credit cards can help you manage short term cash flow problems by allowing you to quickly and easily borrow money for short term use. Digital versions of credit cards also exist that can be loaded onto a smartphone or onto a multi-card device.

Credit Card Providers

The three biggest credit card companies that make up the global credit card payment network include: Mastercard®, Visa and American Express®. American Express tends to issue its credit cards directly, whereas Mastercard and Visa often partner with banks and financial institutions to issue their credit cards.

How do Credit Cards Work?

You usually apply for a credit card with a Bank, Financial institution or directly with the credit card providers such as Amex. When you apply for a credit card you can nominate your maximum credit limit and this would be assessed by the credit card issuer and a maximum credit limit would be assigned to your credit card.

In some cases, the credit card provider may assign a credit limit lower than the amount you have nominated, especially if the amount you nominated is higher than the amount allowed for the credit card type. Credit cards also often have minimum credit limits, so if you nominate an amount lower the the minimum limit you would be allocated the minimum limit. This credit limit is a line of credit that you can use to make purchases in store or online or even withdraw as cash directly from the ATM.

Interest Free Period:

Credit cards offer interest free periods of usually about 55 days (some cards offer fewer or more interest free days). During the interest free period, you would not be charged any interest on purchases you make, but if you fail to payback your credit card balance by the last day of the interest free period you would be charged interest on the amount owed.

It is important to note that interest-free periods do NOT often apply to cash withdrawals made with your NZ credit card. When you withdraw cash directly using your credit card, it usually begins to incur interest on the very same day. Also, cash withdrawal often attracts a higher interest rate than purchases.

Note: some interest free credit cards do offer interest free periods of about 6 to 12 months, but this is not common and only applies to specific no interest credit cards.

Rewards:

Some NZ credit cards offer reward points just for using them. This is because credit card providers such as Mastercard and Visa charge businesses a fee for each credit card transaction you make. Rewards often come in the form of reward points schemes in which you earn reward points for every dollar you spend. You can then use the accumulated reward points for purchases, or in some cases, redeem your points for cash.

Credit card providers also sometimes offer other benefits such as free travel insurance, travel lounge access, purchase protection and more. You can find a list of rewards cards on our Rewards credit cards page.

Balance Transfer:

Some credit cards offer balance transfers, which allow you to transfer your existing credit card debt from another card and repay at a lower rate of often 0% for fixed period.